UK Trade & Investment Strategy

Today I led a parliamentary debate on the UK's Trade & Investment Strategy that was answered by Investment Minister, Graham Stuart MP. Once Hansard is published, I shall post the Minister's reply to some of the issues I raised.

Thank you, Mr Davies, it is a pleasure to serve under your chairmanship. I beg to move that this House has considered the UK’s trade and investment strategy.

By the time this morning is out, we shall know who is to have the honour of being our next Prime Minister. The challenges ahead for that person will be profound, but equally so the opportunities to reshape this great nation.

Precisely one hundred days will lie ahead of them until 31 October, when the extension to our EU membership expires. Each of those days must be used to prepare the UK’s people and businesses for any eventuality, and to move forward with confidence, intent and gritty resolve into our next chapter. In doing so, we must articulate a clear vision of our place in the world, at the heart of which must be both a coherent global trading strategy and a package of measures which demonstrate to international investors our absolute determination to be one of the most dynamic, stable, open and innovative democracies in the world.

This morning, I wish to press the Minister on what he sees as the Department for International Trade’s role in those one hundred days. I want to gather some of my thoughts about our trade and investment strategy from the two years I have served on the International Trade Select Committee. And I want to raise the profile of DIT as it prepares to take on a more central role after three years in the backroom, showing how the right trade and investment strategy can deliver prosperity to the people we represent.

 

Formed as one of the new Brexit departments immediately after the referendum, DIT has faced the ongoing challenge of being excluded from the Brexit process itself - which has been driven by DEXEU, the Cabinet Office and Number 10 – leaving it vulnerable to the decisions and delays of others.

This has stifled proper debate about the extent to which any terms agreed with the EU will limit our ability to devise an independent global trading strategy. Accounting for the threat of the backstop and long-term view to mirror the EU’s rules via a so-called Common Rulebook, the Department has had to plan for everything between protracted EU negotiations that limit our room to manoeuvre, and the complete freedom and vulnerability of a ‘No Deal’ situation. The dilemma has inevitably constrained DIT’s ability to determine what might be offered to non-EU trading partners in any rollover agreements or future negotiations.

Perhaps all of that is understandable and, to some extent, inevitable given the complexity of extracting ourselves from a forty-year relationship. However, in the absence of a strong DIT voice in the Brexit process, there has been a failure to understand potential trade-offs in the Withdrawal Agreement and how rapidly the rest of the world is moving. There has also been a vacuum in informed parliamentary debate on our global trading future – leaving MPs to veer wildly from visions of chlorinated chicken and the bargain basement sale of the NHS to naïve declarations about the speed, value and impact of new free trade agreements.

This state of unreality must end now, not least because it undermines our credibility as a negotiating partner.

It is time to decide on our desired trading destiny, work out how we get there and determine how to maximise leverage along the way.

 

If we are honest, we all want trade with the EU to remain virtually untouched at the same time as we open new market opportunities. We want to acquire the right to regulate and tax as we please and stop club membership rules like freedom of movement. It is what the EU would term a ‘cake and eat it’ strategy. If we boil the last three years down, they have largely been about what price tag the EU wants to place on that goal and if such a prospect is even for sale.

Their answer has effectively been to say that there is no such deal on offer. Instead we must pay to leave, tie ourselves into the EU’s regulatory sphere without a place at the table and wait to see whether we shall be granted any freedom to diverge. Unless we can find a middle ground in our positions, we shall be walking away from the counter and introducing trade frictions and potential tariffs into our relationship.  We must rapidly deal with the consequences of doing so, and DIT will need to be put front and centre of that task.

Earlier this month, with the Trade Secretary before us in committee, I was staggered to learn that DIT had apparently played so small a role in advance of both the 29 March and 12 April deadlines for our leaving the EU. Overnight, we could very plausibly have been left with no formal trading arrangements with the EU to allow for the continuation of tariff-free exchange. Indeed, this remains a very real prospect still today. 

And yet when I asked if DIT had had any discussions within government about drafting the framework for a future FTA to offer the EU at that juncture, the Secretary of State advised both that the responsibility was DEXEU’s and that there would be little point in tabling any offer as the EU would simply reject it. I do not wish to open a debate this morning on the contentious WTO Article 24 process and the likelihood of the EU agreeing to such a mechanism to maintain tariff-free trade.

However, we surely can at least agree –because both the EU and UK have said so - that at some point in the future – either immediately or after some time - the two parties will want to strike a free trade agreement. So why has government not yet drafted an outline of how they would want such an agreement to look, and why is DIT being so squeezed out of this conversation? I have heard incredibly surprising reports too of how little our expensive Chief Trade Negotiator has thus far been used by government to input into our Brexit negotiations. This underutilisation of DIT’s resource has been a strategic mistake.

These next one hundred days must prioritise the close working, if not the merger, of DIT and DEXEU such that our future relationship with the EU is seen in the wider context of what we are trying to achieve in trade – EU-UK trade will of course be a vital strand to our future prosperity, but it is not the only strand. The past three years have been defined by aggressive lobbying by companies and organisations who most benefit from everything staying the same. But we are not giving equal airtime to the costs of ongoing alignment. To give a couple of examples from committee, we have heard from experts who advise that the EU’s REACH system as so onerous and expensive that all the fastest-growing developing markets are looking at adopting the non-EU model of chemicals regulation. Others advise that the EU’s hazard-based approach to farming standards is excluding important technological advancement that could reduce environmental impact.

We must seek immediately to draft a generous framework document for an EU-UK FTA alongside a series of explicitly temporary, ‘stopgap’ continuity agreements with third countries that would allow diagonal cumulation of rules of origin with PEM countries. At the same time, we need to return to DIT’s proposed No Deal tariff schedule and think carefully about how it might best provide leverage in any negotiation with the EU.

 

The Secretary of State assured our committee that his Department would have adequate resource on 1 November to begin simultaneous negotiations on free trade agreements with Australia, New Zealand and the United States, and there is no doubt that this could introduce pressure and urgency to maintaining good trading relations with the EU.

However, we must be careful not to fetishise FTAs or oversell what they can achieve and how quickly. I was particularly pleased to see the Rt Hon Member for Uxbridge last week manage expectations about a US deal. The US are notoriously tough trade negotiators. You effectively have two negotiating partners in the administration and Congress, and there is a limit to what can be achieved given the breadth of matters decided at sub-Federal level. Nonetheless, as the Hon Member for Meon Valley advised our committee last week, given the breadth and depth of our trading links with the US, even a relatively shallow agreement could reap substantial rewards. I understand that our North American trade commissioner, Antony Phillipson, set out to the Department this month his strategy for US-UK trade and I should be grateful if the Minister could give us an overview of what was said, particularly on how we intend to build strong relationships at state level and if we have sufficient resource to do so.

The parliamentary mandate for opening formal US-UK trade talks, and ongoing parliamentary scrutiny of negotiations, will be critical if such a deal is not to fall at the final hurdle or be brought down by misinformation campaigns. The Secretary of State is proud that the public consultation on this deal was one of the largest such exercises ever undertaken. However, of the 158 000 responses to a US-UK FTA, 152 000 of those were individual campaign emails, with only 234 responses from business. I fear this may be indicative of a 38 degrees-style effort to cause alarm about the future of the NHS or reduced animal welfare standards – two matters on which Ministers have already offered countless reassurances.

There is plenty we can do beyond a US-UK FTA that will be less contentious and arguably reap benefit more quickly. Amidst the important debate about the future of our fishing industry and sheep farmers, we overlook the fact that our economy is most heavily dependent on our world-beating financial and professional services. The FPS sector remains key to the ongoing prosperity of our country, with exports more than double those of any other sector and our strength in this area far exceeding any other European financial centre. Meanwhile over 30% of the Trade Value Added in the UK’s manufacturing sector comes from services.

There are no guarantees in the Withdrawal Agreement of preferential access to the EU market for our critical service industries and many in the City are now questioning whether we really want an enhanced equivalence deal that would leave us subject to the whims of EU regulators. The EU should have understood some time ago that the growth in financial services is beyond Europe, with London business as likely to be lost to Singapore and New York than Frankfurt, Paris or Dublin if they try to diminish the City’s competitiveness.

Nonetheless, they seem likely to impose tougher recognition requirements on us. Instead of responding with mercantilist reciprocity, we must seek quickly to demonstrate that markets can trade with one another without needing to regulate each other. The best way of testing this model could be an ambitious Global Financial Partnership with Switzerland, who are having plenty of their own difficulties with the EU right following the expiration of their equivalence regime. A dynamic Swiss-UK agreement including right of market access, mutual recognition and regulatory cooperation could set a gold standard in future services agreements that could in time be rolled out to other important financial hubs.

This will require a more involved regulator, the active cooperation of the Treasury and the engagement of professional bodies to allow for recognition of qualifications. This is where DIT’s role as convenor will become so important. The Department has already established a network of new trade diplomats who sit within embassies to identify market access issues, build commercial relationships in-market and triage problems among relevant government departments. I would recommend that in key services markets we add to their number representatives from our own financial regulators, copying the example of the Monetary Authority of Singapore, which has offices around the globe in recognition of the fact that services deals are as much regulator-to-regulator cooperation as government-to-government.

 

A gold standard financial services agreement could be complemented by gold standard FTAs with New Zealand and Australia. I have said many times that these are not the biggest markets. But we have in both willing partners who can help advance our wider global trading agenda. They have experience in big and growing Asian markets, there is complementarity of language, culture and legal systems and an appetite to cooperate on quality food production, retail, healthcare, fintech, defence and education. Meanwhile, working together at the WTO we can embed important work on e-commerce and reinforce the multilateral, rules-based system.

There is plenty of diplomatic work that can be done to enhance other trading relationships without needing an immediate FTA, though such FTAs can be incredibly useful in providing momentum and focus. The Hon Member for Meon Valley talked in committee of the staggering size of the Chinese cosmetics market, which we find hard to access due to Chinese rules that require animal testing. If work could be done to demonstrate the quality and provenance of UK goods, the additional market access could be worth in the region of $10 billion – this would overshadow the benefits of most FTAs with smaller countries. The Institute of Directors talked of similar barriers to trade for UK engineers, architects and planners over Chinese design licences. Sometimes seemingly intractable market barriers can be lifted very quickly in response to Chinese citizens’ concerns, particularly in areas such as food and healthcare, where a demand for high quality international products followed a series of consumer scandals.

Not only can DIT flag these barriers and work with diplomats to remove them but they can highlight to our domestic businesses what kinds of opportunities are out there. The Secretary of State spoke last week of how DIT helped a Cumbrian milk producer attend a trade fair in China that opened business to him worth hundreds of thousands of pounds. Legislative developments are important to spot too. To give one example, Indonesia is to demand sharia-compliance of financial products by 2025. With London one of the few financial centres with expertise in this field, our insurers and financiers could steal a march in this vast market. And at the latest Belt and Road summit in April, the Chinese state pledged to put no more capital into BRI projects, capping the level that Chinese banks can fund of each project. This change of approach could open new opportunities to UK legal advisers, financiers and construction firms.

We need to empower the Department to do even more of that work. That will require skilled personnel – I was delighted to see the launch of DIT’s new training scheme last week for trade negotiators and diplomats. We also need to leave them in post long enough to develop the long-term relationships and market knowledge that will reap dividends. There is currently too much churn, which is particularly problematic in markets like China where the guanxi - relationship-building with provincial governments - is key.

 

In advance of this debate I was sent a briefing by the Open World Research Initiative, a collaboration between fifteen UK universities that is calling for a Chief Government Linguist to embed language policy across government. I think this is a great idea. While technology is moving on at a pace in this area, to understand a language and its nuance is to gain a deeper cultural understanding of and stronger relationships in future markets of importance. I would also like to see us soup up the work of our international Chambers of Commerce as well as long-term, party-to-party political relationship building. I have spoken before about how Germany is particularly expert at this through its stiftung model which operates almost as a political diplomatic service, and its very activist Chambers that have presence not just in capitals but in important regional centres. We must bear in mind that some of these big Asian cities are prominent economic actors in their own right, often larger than small European countries.

Going forward, I want to see DIT work much more closely with the FCO and DfID to merge our international output into a coherent strategy. As the Rt Hon Member for Chelsea and Fulham has highlighted frequently, the strength of our voice on trade is fundamental to our relevance as a respected actor on the international stage. I was very pleased to see yesterday the announcement that DIT will be able to access the overseas aid budget to link our trade and aid work. In this vein, the Government should work with, and challenge, the City to become the sustainable development finance hub of choice, cementing London’s position as the ‘go to’ financial centre for Africa and South Asia’s gateway to global capital markets.

 

DIT has a big role to play domestically as well. One of the problems facing UK business is not a lack of demand for their product but a reticence in bidding for international contracts and a nervousness about exporting. DIT has been addressing this with energy and creativity but this work is not given the prominence it deserves. The export toolkit launched last week is an attempt by the Department to give MPs responsibility for identifying businesses and projects in their constituencies that could benefit from export and inward investment opportunities.

DIT is uniquely placed to know how to make our domestic market attractive to the kind of inward investment that creates jobs, adds value and increases tax take here in the UK. Their end-to-end service for international investors is important but we must also look at a single window for business registration and investment information. Similarly, it is vital that we keep an eye on the competition as the trade promotion bodies of France, Germany and Spain step up their game.

There is already a Business Environment Advisory Team which flags barriers on skills, migration, tax and development and I would like to see that work given more prominence so that we can make the UK one of the most attractive, tax-competitive markets in the world. It should also look also at how we give our financial regulators an explicit competition mandate to embed London’s dominance as a financial services hub. Work must be done with the Home Office to break the link between long-term labour migration and Mode 4 so that our desire to control immigration numbers does not hamper the ability of companies to move key personnel.

We must be equally alert to investment that is against our national interest. There is a big difference between greenfield FDI that creates jobs, embeds skills and generates long-term tax revenue in the UK and speculative investment, the use of these shores to park dodgy money or the strategic purchase of critical assets accelerated by the cheap pound. I was horrified to see the Sunday Times expose of the Tier 1 investor visa and I am similarly concerned about the security implications of allowing critical infrastructure to be foreign-owned. Our committee is likely to recommend improved modes of data collection on FDI so that we can better sort the wheat from the chaff and get a more accurate sense of investment trends. 

We have perhaps suffered from naivety in recent years that all inward investment is good investment, fearful that any clampdown on flows into the UK would signal that we are closing in on ourselves. Australia and Singapore take a much more robust approach to property and infrastructure investment, particularly that which affects national security, that does not detract from their reputations as open economies. I would ask that we look at the Australian model of a Foreign Investment Review Board which rarely sees sales blocked but can add conditions to any investment and which applies caution over foreign influence. I am pleased that the government is already reviewing our approach via the BEIS White Paper on investment launched in July 2018, and I ask the Minister if he has any update on this work.

 

The next one hundred days will be critical in addressing some of the strategic errors made in the Brexit process these past three years, and the Department of International Trade must play a full role in that work. While it is frustrating that so little progress has been made in determining the future EU-UK trading relationship, equally DIT has now had three years to establish opportunities, expand networks and increase trade expertise so that it is ready to go. Now is the time for the Department to be unleashed so that we can draw up a trading strategy that will grow our economy, entrench our values on the world stage, and deliver exciting exporting and value-adding investment opportunities to every corner of our United Kingdom.